By Jason Simpkins 2015-02-13
A few weeks ago, I talked about the new gold bull that's begun. Silver is headed up, too.
In fact, silver is off to its best annual start since 1983, while gold outperformed every major market index in January.
Gold prices surged 10% last month, compared to a modest loss for the S&P 500.
The underlying cause of this bull is weakness in every major currency outside of the dollar. And the dollar itself could be due for a major setback if the Fed backtracks on its promise to raise interest rates later this year — something that's increasingly likely.
We've basically entered into a stimulus spiral at this point. The global economy is simply unable to function without its monetary lubricant.
It's like a junkie going through withdrawal.
So gold is going up... as are gold miners.
In fact, mining companies are outperforming the metal itself. And they may even be the better investment of the two going forward.
The Bargain Rack
The Market Vectors Gold Miners ETF (NYSE: GDX) is up 14.5% so far this year.
And with good reason.
These companies have been vastly oversold.
GDX lost about 11% last year as investors sold on the stronger dollar. But as I pointed out months ago, gold miners — somewhat paradoxically — are in better shape than they've been in years.
Gone are the days of bloated balance sheets and high debt loads. In are lower costs, higher yields, and a tighter focus on quality assets.
The bottom line: There's rarely been a better time to bargain hunt.
Just take a look at some of these valuations...
- Alamos Gold Inc (NYSE: AGI) has a price/book ratio of 0.92 and a dividend yield of 5.3%.
- Yamana Gold (NYSE: AUY) has a price/book ratio of 0.55 and yields 4.7%.
- And Pan American Silver Corp (NYSE: PAAS) has price/book ratio of 0.85 and yields 4.2%.
Alamos is in an especially strong fiscal position, with about $360 million in cash and no debt. Its total cash costs were $700-$740 per ounce in 2014. And while that's expected to rise to as much as $865 per ounce this year, the company is still very well positioned with gold at more than $1,220 and rising.
With silver rallying some 17% from its November 2014 low, Pan American is another good bet.
Pan American Silver is the world’s largest primary silver miner. It has a portfolio of quality assets throughout North and South America, with reserves totaling 2.5 million ounces.
Its silver production edged up 1% in the nine months through last September and gold production increased 14% in that time.
Better still, Pan American's all-in sustaining costs for the same period fell 11%.
There's something else I want to mention, too, and that's the potential for deal-making...
Tie-Ups & Takeovers
Like I said earlier, there are a lot of undervalued assets out there right now. And the miners who didn't over-extend themselves during the last decade's bull run have a tremendous opportunity to snap up competitors.
About $10.5 billion worth of deals were done last year. And another $2.7 billion in deals have been announced or completed this year, which is still in its infancy.
In fact, on Monday Tahoe Resources offered $1.1 billion for Rio Alto Mining Ltd.
And with a good mix of sellers and buyers on the markets more deals are on the way.
Kinross Gold Corp. (NYSE: KGC), Canada's third-largest miner is one example of a potential suitor.
CEO Paul Rollinson had this to say in December: “As the clock ticks on with this gold environment, balance sheets, access to capital, those all sometimes become catalysts for M&A. Our strategy has positioned us well to perhaps be opportunistic in that regard.”
Kinross has been one of the rare companies benefiting from a stronger dollar. With operations in Russia, Kinross has been able to save about $20 per ounce in costs, thanks to the beleaguered ruble.
A potential seller is AngloGold Ashanti (NYSE: AU). The world’s third-largest gold miner is looking to sell assets or form joint ventures to reduce its debt load
Beyond that, some smaller takeover targets include:
- Pretium Resources (NYSE: PVG)
- Continental Gold (OTC: CGOOF)
- And True Gold Mining (OTC: RVREF)
Feel free to check them out for some speculative gains. Or you could hedge your bets with the Market Vectors Junior Gold Miners ETF (GDXJ). It's up about 11% so far this year.
Whatever you choose, it's going to be hard to miss in this environment. The outlook for gold is strong and gold miners are in good shape.
Get paid,
Jason Simpkins
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